Oral evidence: Service family accommodation HC 77

Oral evidence, 8 June 2016.

Witnesses

Stephen Lovegrove, Permanent Secretary, Ministry of Defence, Colin Wood, Interim Chief Executive of the Defence Infrastructure Organisation, Lieutenant General Richard Nugee, Chief of Defence People, and Richard Lumby, Managing Director, Carillion Defence and Security, gave evidence.

Chair

This room was built for speakers, so the acoustics are not great. I remind our witnesses to speak up, because it can be a problem for people to hear, particularly those behind you. I welcome our second panel. Colin Wood is the chief executive of the Defence Infrastructure Organisation, the oft-quoted DIO, as it is often called. We have Lieutenant General Richard Nugee, who is the Chief of Defence People at the Ministry of Defence. We welcome back to Stephen Lovegrove, who is a permanent secretary at the MOD but only a week ago appeared in front of us in his former role. I think this is your first outing as permanent secretary?

Stephen Lovegrove

Variety is the spice of life.

Mr Bacon

We will hold you responsible for everything.

Chair

You have to remember, Mr Lovegrove, that as long as you are working in the civil service, we can call you back on anything you have ever done, so we could have quite a time. Finally, we have Richard Lumby, who is the managing director of defence and security at Carillion, which manages the contract we are discussing today. I highlighted at the beginning some of the issues of this hearing. It is worth emphasising that Caroline Dinenage, the Member of Parliament for Gosport, whom I quoted earlier, highlighted the issue of the regulations for private landlords being stricter, giving civilian tenants greater rights and protections. One of the things that has come out of the evidence we received outside the NAO Report is the sense of injustice. The issue is not that the system is different, but that they get fewer rights than they would if they were civilians. Given what they and their families give to our country, that is something we should bear in mind. Over to you, Anne-Marie Trevelyan. I should just remind you that the hashtag is #forceshomes, if anyone is following it.

Mrs Trevelyan

It would be helpful if we could start off with an overview. May I ask all of you, within your roles, how you see the MOD and your relationship with its long-term aims for the provision of service family accommodation? The recent data show that 47% of military families own their own home somewhere in the UK, but 72% of them live in service family accommodation. As we heard earlier—particularly, but not exclusively, with the Army—the need to be on base, behind the wire, and to have your family with you is a really important part of the morale requirement for all those armed forces personnel. How do you see that long-term vision for it? Perhaps you could start, Lieutenant General.

Lieutenant General Nugee

Thank you. We absolutely acknowledge the importance of quarters where appropriate. We have always—certainly recently—very strongly encouraged home ownership, because every member of the armed forces eventually leaves and goes into civilian life. To leave at the age of 55 without a house and with nowhere to live is not a particularly good strategy. We have encouraged, from a very early age, all our soldiers, sailors and airmen to buy their own houses. We have put in place a forces help to buy system to help them go through that. We have spent well over £100 million on encouraging people and providing some financial support to allow people to buy their own houses. Where is the way ahead? We are not only going to continue to encourage people to buy their own houses. My family is no different from many other military families; I have had the most fantastic support from my wife, who lives with me in quarters. In fact, we own our own house now—I am following my own advice. I have always found that having the family together is a really important element. It is slightly different for the Navy, as you have heard. However, we are looking to bring the housing and accommodation policy into the 21st century to allow our service people slightly more freedom as to where to go and what to live in. The idea of an allowance, which will give them the freedom to go on to the open market and look for a property that suits them, is something that we would encourage. We get out of a number of the rules and regulations that we have put in place for service families accommodation by allowing them to go on to the open market where appropriate. We are talking to the families federations, and I would strongly encourage the policy that was mentioned earlier on health and wellbeing and the families strategy. I was responsible for that in my last job, and we firmly brought the families federations in very early to help with that. I strongly hope that that is the case for the new policy. We are looking to give them freedom of choice, rather than to tell them, “This is the only quarter available for whatever circumstance; therefore, you have to move into that quarter.” I think the way ahead is to offer choice. If there are only quarters in the area in some of our most remote locations, we are not going to get rid of quarters and throw people out on to the street—of course we are not. We are going to keep what is appropriate for the place and the region that we have our soldiers, sailors and airmen living in.

Stephen Lovegrove

I will not repeat what Lieutenant General Nugee said. Previous witnesses have borne eloquent testimony to the fact that the accommodation offer is incredibly important to our armed forces personnel. The Department acknowledges and recognises that and we will be working to ensure that our responsibilities are honoured. Maybe one of the easiest ways to get into it is through the armed forces covenant. That covenant contains a commitment to provide good quality accommodation in the right location at a reasonable—in fact quite heavily subsidised—price. That is something that we want to see happen. Looking at the estate, as I can now with relatively fresh eyes, I would say that the quality of the estate seems to have improved over the past 10 years or so. What has certainly not improved over the past two years or so is the way in which the estate has been maintained. I am sure we will be getting on to the CarillionAmey contract. It is absolutely my Ministers’ and my colleagues’ commitment to ensure that the estate is maintained and is kept up to the kind of standards that our armed forces have every right to expect. That is why we have the improvement plan, which we talked about and will no doubt talk about again. That for me is the main focus right now, to make absolutely sure that the people who are looking after this estate for us and providing quality accommodation for armed forces families are fulfilling their obligations under the contract.

Mrs Trevelyan

Thank you. That is helpful. You mentioned the armed forces covenant. It is very clear across the board, which obviously includes housing, that there should be no disadvantage. Any number of service personnel say, “We are not asking for favours.” They always say that; that is the first thing they say. We are going towards a decent home standard as the premise for rental payments. Presumably, the MOD has realised that that is a perfectly reasonable base from which to start, because everyone else in a Government-owned property is based on that same level, but that is quite a challenge. A lot of people who have contacted me feel that the MOD does not necessarily seem to have an understanding of that and that because of the nature of the Annington Homes ownership, the direction of travel will not push to maintain the estate. From an MOD perspective there is not a driver to push for DH or DH Plus in the longer term, because the MOD does not own these properties.

Stephen Lovegrove

Well, we don’t own these properties. We have given a 999-year lease to Annington Homes and leased them back for 200 years. We have got the in perpetuity lease and we have got the 200-year lease, so I think we do feel extremely heavily invested in this. The question of standards is an interesting one. We have moved to the kind of standards that DCLG would promulgate under decent homes and decent homes plus. I am glad we have done that because I think it has revealed that some of our housing stock is frankly not at the level that we need it to be. Under the previous four-tier grading system, we managed to get 99.5% of the houses graded as tier 1 or tier 2 houses. I think that tells you that, sure, they were improving over time. It also tells you that that grading system was no longer fit for purpose. Under the new grading system we are around 88% designated as decent homes and 79% of those are decent homes plus. I want to see that get to 100%. I do think we have the tools to do it, and we certainly have got the commitment. I can certainly give you that assurance.

Mrs Trevelyan

That is helpful, thank you. Talking about the covenant, Mr Lumby, you have signed up to the corporate covenant as a company and so has Amey. The reality, if you are a member of the armed forces serving, is that this contract so far has not been brilliant—we will come back to the detail. I have no sense, as someone here to see if the armed forces covenant is happening, that the commitment that you signed up to at corporate level, which goes into the corporate responsibility bit of your accounts and makes you all shiny and great, has filtered down to the guys at the call centre about what it means to be part of the armed forces covenant. Because what that means would be to provide a better service. How do you as a company that has very large numbers of Government contracts, many of which are MOD, feel that you are actually driving that covenant through your corporate structure to impact the people it is meant to, which is the serving personnel at the bottom of the chain?

Richard Lumby

The first thing to say is that signing the corporate covenant as Carillion—I can’t talk directly for Amey or for CarillionAmey themselves—is an important part of what we do and what we think of ourselves as an organisation. It is our commitment to our people and to motivate people. There are some very pragmatic things about utilising people who are leaving the forces, utilising their skills and giving them a purpose, and we can do that, so that is one thing. The second thing is the clear juxtaposition that we are in at the moment. You could say, “You’ve signed the covenant. How come you’ve got this awful performance?” I think it is fair to say that we have absolutely let ourselves down as CarillionAmey and Carillion and Amey in the last 18 months of the last contract.

Chair

Not as much as you have let down the families living in the homes.

Richard Lumby

If I may, from that perspective I have been involved in the contract and the predecessor contract and military contracts since the inception of the previous contracts. On a very personal basis, it is important to me. I am passionate about that and the recognition that what we aren’t is a housing contractor. What we are is in many ways the provider in ensuring that people have a home to go to and everything else. I feel that is important. We have undoubtedly dropped a big clanger—many big balls—and put a lot of people and their families through discomfort in the last 18 months. We are incredibly sorry where we have done that and caused significant failure for them and discomfort.

Caroline Flint

But Carillion have had responsibility for supporting forces’ families in terms of maintenance before.

Richard Lumby

We have indeed.

Caroline Flint

So it is not like you can say that you don’t know the situation and complexities involved, and the moving in and out of families in meeting the needs of what the services require of them. What is it you have learned from what you did before, but which you obviously haven’t put it right. What is going wrong?

Richard Lumby

It is a change in contract—

Caroline Flint

Basically, it is making sure houses are clean for people to move in, and making sure maintenance and contracts and the management of those contracts is carried out properly. It is not having people turning up, as witnesses have said in the last session, and taking a spanner, clanging a boiler and walking away.

Richard Lumby

I totally accept that. There is not a lot of difference between the contract we are in now and the previous contract, although there is some expanded scope that has gone very well from the first day; one of your previous witnesses said that. We have changed the modelling that we operate. We have looked to modernise it because it is a medium to long-term contract. The previous contract itself was coming to an end and needed some modernising in its underlying processes. Certainly the IT systems that we had in place were getting to the end of their life, and we have certainly not managed to get those up and running, which are required for us to deliver the service and the customer experience.

Chair

Mr Lumby, I think that Caroline has hit the nail on the head. It is not rocket science. You were doing this already. You have a lot of Government contracts. Anne-Marie, can you remember the number?

Mrs Trevelyan

Sixty-two at the moment.

Chair

Sixty-two Government contracts. So you are not new to working with Government, either, and yet the very people who should be getting the service, as we have heard very clearly and as the Report shows, are not. I can’t quite see how you can sit here saying what you’ve said. I don’t doubt you have got some personal sincerity in this, but you are not delivering. You and your organisation have failed these families. Why?

Richard Lumby

We have undoubtedly not got our systems, our underlying IT systems, running effectively to start with, and we rely on them to deliver the contract. We had an old system and we maintained use of that where we could, but it is not configured to deliver the requirements under this particular contract.

Chair

So why did you sign the contract if you couldn’t deliver it?

Richard Lumby

Clearly, we believed we could, and we have the absolute intention to deliver. Then and now, the action plan that we have in place and the ones we successively put through last year are having success, and we believe that we are now delivering to those contractual KPIs. What is more important to us—it is in our improvement plan—is that the experience that the people who live in those homes have is improved, let alone to hit the contract targets themselves.

Chair

Caroline Flint will finish off; then Chris Evans, Stephen Phillips and back to Anne-Marie Trevelyan.

Caroline Flint

On page 23 of the Report, paragraph 4.7 says, “CarillionAmey receives approximately 25,000 calls related to maintenance work to Service Family Accommodation every month.” The key statistics on page 4 of the Report state that there are 50,000 service family accommodation units in the UK. So there are 25,000 calls per month on maintenance issues for 50,000 units. Am I old-fashioned or something? I like to think I can used an iPad and a computer. When you are getting that level of calls from families, what about just picking up the phones to families and saying, “What happened with you and the contractor when they came and did the job and left you with a boiler that didn’t work?” Has the old-fashioned system of talking to people gone completely out the window with you when it comes to customer service with you?

Richard Lumby

We do follow process. We do a call back to a sample of 5% of all the response maintenance activities we carry out. The company brings that information in-house and looks at the areas in which we need to improve. Then we can see how we need to put the service right or, indeed, where our contractors or our own processes are failing. We have had that engagement for a long time. We follow that and we pick up on the complaints process and the complaints. And, of course, we pick up on what we hear from social media. That is a massive part of our business and drives the business. The board, on which I sit, as against senior management, are massively interested in that and are holding to account the management team on explaining where we are, what they are doing about it and how we improve.

Chris Evans

Paragraph 4.15 of the Report says, “65% of CarillionAmey’s workforce are small and medium-sized enterprises”. Are they cowboys?

Richard Lumby

No, we don’t look to employ cowboys. I would not typify them as cowboys.

Chris Evans

That is what it sounds like. From the anecdotal evidence we heard from Mrs Phoenix, it sounds like you have a bunch of cowboys there.

Richard Lumby

It does sound like that, from time to time, we—

Chris Evans

And if that happened in my local area, they would be reported to trading standards and struck off. Why you are allowing that level of service for people who are risking their lives for this country? It is an absolute embarrassment to be before the Secretary of State because you could not fulfil your contract. Why should people have confidence in Carillion to fulfil any of the Government contracts, based on this Report?

Richard Lumby

If I may take that, our engagement with our supply chain is critical. We look to employ the supply chain that we should and we look to SMEs because we believe that is important. Indeed, we look to give them terms and conditions of employment that work and are encouraging and motivational. What we are doing and will do is take contractors who are not good enough and we will work with them. Indeed, in our improvement plan now, we are working with one of those major suppliers and embedding people into their organisation and them into us, as well as giving them training, to see how we can improve. Our steps are to take SMEs, to work with them to see how they can improve and to give them the tools and training. If it fails, we need to move them on, like anywhere else.

Chris Evans

You haven’t been moving them on, have you? If this is still happening, you have not moved them on.

Richard Lumby

Our improvement plan, which we take extremely seriously, has been working through the past few months. If I were to look at the KPI delivery performance as of today, compared with where it was, we would be performing to the contractual targets. Inevitably to turn this around in reputational terms—we are realistic about this, and one of the witnesses talked about our reputation—and to take away not just the anecdotes, but the dreadful experiences that people have will take us some time, but that is what we are going to do.

Chris Evans

You are using a lot of corporate-speak but I do not think you realise how serious this is. These are people who risk their lives for this country. This isn’t like working in Barclays or Lloyds Bank, where you go to work every day. These people are risking their lives and they deserve the best. They are not getting that from you, Mr Lumby, and I don’t think you get how serious this is for so many people. It is alright quoting statistics at us, but there are people out there tonight living in damp homes and places where there is mould. It is your company’s responsibility and you are not doing it. Now, do you honestly think that your reputation is not on the line over this?

Richard Lumby

I absolutely believe that our reputation is on the line, and that is important. What is more important to us is that we put those things right where we can. We are not the provider of the quarters. We are the maintainer of it and we maintain it in the contract that we have, which is the one that was described before. Clearly it is important that where there is work that we can do, and we can do of our own volition, we do it to the standard that is required, we do it effectively, we do it on time and we do it in a manner in which the people in the house feel that their home is right for them. We spend a significant amount of time with the families federations and with the chain of command listening to them, working with them and identifying what it is that we need to do to put things better.

Stephen Phillips

Mr Lumby, it is helpful to hear—correct me if I am wrong—that you are sorry about your performance to date. Is that right?

Richard Lumby

Indeed we are, yes.

Stephen Phillips

In fact, you accept that that performance under the contract has been lamentable.

Richard Lumby

Under the contract we have failed on our contractual KPIs.

Stephen Phillips

And yet you won this contract from the MOD. So things may be getting better now—we will come back to that—but I want to know why you were not delivering from day one on a contract that you tendered for, undercut everyone else on and won. Why were you not delivering from day one? What were the problems?

Richard Lumby

I will come back to our underlying major problem: the systems that we have that help us maintain over 30,000 activities a month did not operate the way we needed them to. We brought in a large number of people through the TUPE process from different parts of the country; we had to bring them into our organisation and give them training and development. We started the contract in the middle of the winter, which is never a great time to start. So there are a number of things that happened. Should I have anticipated them all? Yes, I did. Do I think we anticipated them all? Yes, I did. Did we actually get it right? No, we did not.

Stephen Phillips

I just do not understand that answer. You say you anticipated that these problems, which you blame your poor performance on, would occur. You had to TUPE in relevant employees and have in place a system, whether a computer system or another, that would enable you to deal with the volume of work that had to be done. All of that will have been in the tender documents from the MOD and looked at, and you accept that you anticipated it. So how do you explain to service families sitting at home watching this hearing, who have been living in accommodation that is not just cold, damp and mouldy but where the ovens do not work and heating does not work for weeks, the poor—indeed lamentable, terrible—performance of CarillionAmey? These people put their lives on the line for us and leave their families at home when they go to theatre. How do you explain it? What is your answer to them?

Richard Lumby

First, I repeat my apology. It is sincere and it is on behalf of the company. Having said that, that does not explain why it is we are where we are. We do rely on systems and process. Unfortunately, we did not that right. The national infrastructure that we put in to upgrade both the IT and the systems is significant. It is over 200 bases in the UK and it has been a transfer from what was the MOD’s own secure intranet into our—

Stephen Phillips

All of this is entirely predictable, Mr Lumby.

Richard Lumby

Indeed it is. Did we manage to do it in the time? No, we did not and, on top of that, our systems did not work the way they should have done.

Stephen Phillips

Okay, which leads me to this question. Mr Lovegrove, I appreciate that you have only been in post as permanent secretary for a week, but how on earth did the Department give this contract to CarillionAmey?

Stephen Lovegrove

I can give you as much of an answer as I can give you, as it were. The contract was won by CarillionAmey obviously by providing the most competitive bid.

Stephen Phillips

Does that mean the cheapest bid?

Stephen Lovegrove

It does mean the cheapest bid, but of course it does not mean that it was the cheapest bid against a different set of standards from those anyone else would have contracted for—

Stephen Phillips

But you get what you pay for, don’t you? It seems what the Department paid for is a rubbish contractor who was not doing to discharge its functions under the contract.

Stephen Lovegrove

I think the Department understandably had faith in the concept of competition when it comes to handing out these types of contracts. I think, however, there is a question about how we assured the ability of the contractor to be able to perform to the contracted standards.

Stephen Phillips

Can you just pause there, because I want to unpack that from civil service-speak? What you are really saying is that the civil servants who looked at the bids did not appreciate that CarillionAmey did not have the systems in place to be able to discharge the functions under the contract.

Stephen Lovegrove

No, I am not saying that. I am saying that to the extent that the civil servants who were looking at it—it was independently assessed; Mr Wood may be able to give a little bit more detail about this—they were satisfied, clearly incorrectly as it turned out, that CarillionAmey were capable of discharging their obligations under the contract; and as you would expect, the civil servants in question advised their Ministers to accept the bid on the basis of price. I think that is a very standard way of going about it. Having said that, because of the very poor standard of performance of CarillionAmey over the first 18 months and—as came out, interestingly I thought, in the previous session—the quite sharp increase in performance over the last couple of months, we need to be very, very careful when we look at whether or not we should terminate this contract. It does seem to be the case that CarillionAmey is now hitting the vast majority of its key performance indicators—basic targets, of which there is a suite of about 40. Whether maintaining that level of performance is sustainable for CarillionAmey, or when the heat is off they will start taking people away or dropping their focus on it and it will drop away again—that is something that we will absolutely not be prepared to see happen. I asked Mr Lumby and his colleagues about this yesterday and said very clearly, “You need to give me a personal assurance that the kinds of sustained improvement that we have seen so far are going to be sustainable for the long term.”

Stephen Phillips

Was that at a meeting in preparation for this hearing?

Stephen Lovegrove

No, it wasn’t. It was a regular meeting, which we have with most of our contractors, as you would expect. It is vital that we do not lose what we have managed to get in the past couple of months. That is really the message that I am trying to get across to you, and that is what we are focusing on at the moment.

Stephen Phillips

I understand that. Forgive me; I am going to pick up on one thing that you said about which I am very concerned. You said that CarillionAmey are now meeting the majority of the key performance indicators.

Stephen Lovegrove

The exact figures that I have—it is a three-month improvement plan and in February, which was when it started, they were—

Stephen Phillips

Do you have figures for the end of May? It will become clear in a minute why I am asking you that.

Stephen Lovegrove

No, I do not have figures for the end of May. I have figures for the end of April, the end of March and the end of February, but I do not have figures for the end of May.

Stephen Phillips

The reason I ask you about that is that I asked the Parliamentary Under-Secretary of State, Mr Lancaster, about this in the House on 18 April, and in his answer to me, he said that CarillionAmey had “committed to meet all the key performance indicators”—including those in the national housing prime contract—“by the end of May 2016.”

Stephen Lovegrove

Yes, that’s right.

Stephen Phillips

Are they?

Stephen Lovegrove

I don’t know, because we have not got that information yet. It is only eight days into June, so that information will probably come in in about 10 days’ time, I would guess.

Chair

Can we have that? We want to see that.

Stephen Lovegrove

Absolutely. I would be delighted to send that information to you. Can I give you an indication of what has happened so far, as far as I know, notwithstanding the fact that we do not have figures for the end of May? In February, seven out 38 KPIs were being hit; in March, it was 29 out of 38; and in April, it was 34 out of 38. That is an indication of the rate of improvement. Clearly, what needs to happen is that Mr Lumby and his colleagues need to be able to get to the full set.

Chair

Can I be clear? Have you any intention of having these externally audited or vetted?

Stephen Lovegrove

We are going to be having them externally audited.

Chair

Can you just explain who you are using and what you are doing to do that?

Colin Wood

We will have them audited by the end of June. We will do a further audit across the whole dataset by August, and we will advise Mr Lovegrove and the Secretary and State on our findings.

Stephen Phillips

When you write to us, can you tell us what these 38 key performance indicators are? I know that Mrs Trevelyan has asked previously and we have not had an answer.

Colin Wood

We can do that.

Stephen Phillips

Can I pick up on one more point, Mr Lovegrove? You say it was not the fault of the civil servants who assessed CarillionAmey’s tender; they thought that they were capable of meeting the standards in the contract at the price that they had given, which was competitive, which is another way of saying cheaper than anyone else’s. Does that mean that your view is that CarillionAmey lied in their tender bid about whether or not they were capable of meeting the contract?

Stephen Lovegrove

It sounds to me like CarillionAmey probably underestimated their capacity to handle the transition period.

Stephen Phillips

That is a polite way of saying that they misled the Department.

Stephen Lovegrove

No, I think it is a reasonable way of saying that they misjudged their ability to handle that transition. I think that it is perfectly possible to have an honest misjudgment. It does not alter the fact that if they do not fulfil their contractual obligations we will terminate the contract.

Chair

Let us say that at the end of May, for argument’s sake, they have met them all. How well will you really be monitoring—I suppose Mr Wood should answer this—that they are still meeting them at the end of June, July and so on?

Colin Wood

We have consistent monitoring, so we will be monitoring them on a weekly basis and that then has a roll up into monthly.

Chair

So were you monitoring them through 2015 as well?

Colin Wood

We were. That was one of the issues that flagged up the poor performance throughout the year, which led to the escalation through Ministers and then to the Secretary of State.

David Mowat

The question here is on contracting strategy though, isn’t it? Look at figure 9 in the Report. It was not just the one contract that you let to them, was it? It was all of them.

Colin Wood

There were a number of other contracts: of course, the regional prime contracts, and there are others that sit on the training estate land map.

David Mowat

So you actually made a decision not just to let this contract; you just had to let every single contract that you had to them.

Colin Wood

Not all of our contracts. The training estate is managed by a different contractor, but five of the seven contracts were—

David Mowat

But you let several contracts to them. Was there ever an issue of capacity in your thinking when doing that—that maybe every single contract going to them was too much?

Colin Wood

One of the key tenets of the test of the assurance was that CarillionAmey had to demonstrate that they could meet that capacity challenge. That was looked into before the final contract was awarded.

Caroline Flint

How many bid for the contract?

Colin Wood

In total there were six contractors, and there was a challenge to three of the regional prime contracts, which was then negated through discussion.

Caroline Flint

Just quickly, you have only withheld £10 million of £150 million payments made to date to CarillionAmey. Why have you not held back more, given their performance?[1]

Colin Wood

In terms of the mechanisms under the contract, we are unable to hold back more. We are investigating that through our legal services at the moment, to see whether there is another mechanism that we can either use or build into a future contract.

Chair

I am going to bring Anne-Marie Trevelyan back in, but I just want to alert colleagues and witnesses that we are likely to have a vote in about 10 minutes’ time so we will have to adjourn briefly for that. Anne-Marie, you have the floor until then.

Mrs Trevelyan

The NAO Report identifies about £660 million of investment into improving conditions of the housing stock—that is how it is described—between 2009 and 2015. That is about £110 million a year. For 50,000 homes, that is nearly £2,500 per property. Now if that it is how it has worked, there should be shiny new kitchens and shiny new bathrooms in every single property, which clearly there are not, based on a great deal of evidence that I have received. Parking that to one side, because we are where we are, how are you using the income from rents? How does that work? It has been very difficult to understand. Although they pay a subsidised rent, they are paying a rent. How does that feed through to the investment into the property, if that £660 million is actually netted off by a large amount of rent over that period?

Colin Wood

Any rental income is reinvested back into the estate. It would be very true, under the CAAS strategy, that any extra revenue generated goes straight back into accommodation.

Mrs Trevelyan

What do you mean by “extra revenue”? It just generates revenue; you charge them rent and they pay it to you.

Colin Wood

One of the challenges under CAAS is that there has been an increased revenue. I want to be really clear that that increased revenue goes back into accommodation.

Mrs Trevelyan

And in the last six years, when this £660 million has been invested in the housing stock, where was the rent going?

Colin Wood

The rents then would also go back into the estate.

Mrs Trevelyan

That is a net figure; £660 million is a net amount of investment by the MOD.

Colin Wood

That was the net amount of investment split across both capital and revenue generation as well—

Mrs Trevelyan

Yes, indeed. From the families’ point of view, if you live in private rented accommodation and pay your rent, you expect the maintenance to be at an appropriate level for the rent you pay. Rents are going up. I have not had a single family or person say to me that they mind the rents going up. They completely get that the modern world is moving forwards; literally not a single person has said that they mind that. Some of them have had a bit of a shock, but they are getting over it. But there is going to be a substantial increase in the rental income that is coming in. Do you have any idea what it will be annually over the next five years, until you get to the point of the full rental payment that you are taking them to?

Colin Wood

In terms of CAAS, £30 million.

Chair

Is that £30 million per annum?

Colin Wood

It is £30 million, which would be reinvested back into the estate—

Stephen Lovegrove

By 2022.

Colin Wood

By 2022.

Mrs Trevelyan

So will it go directly into all the service family accommodation? When you say across the estate, there is a lot of building in the single living accommodation going on.

Colin Wood

It goes across both.

Mrs Trevelyan

So it is both. There is a lot less money coming into the single living than there is into the family, so the family housing is subsidising single living accommodation in terms of rental investment.

Colin Wood

It is going across the accommodation piece. At times people who normally live in service families accommodation can live in single accommodation as well, so it is investment in the quality of our overall accommodation offer.

Mrs Trevelyan

Who is going to make the decision on how that spend is made year on year—the split of that rental income, that increase in rental income?

Colin Wood

Defence Infrastructure Organisation, my organisation, would do that across the most appropriate quarters or the most appropriate single living accommodation.

Mrs Trevelyan

And where is the military input, if I might ask you, General, in terms of the changing face of how we are doing things? At RAF Odiham, we have two new squadrons turning up, with the appropriate number of personnel and families who go with that. How is that all feeding together to make sure that the service family accommodation that is there is right? How are we going to use the income that we have coming in to add to that portfolio—or will that be an extra capital investment?

Lieutenant General Nugee

We need to make sure that the right number of properties are available to our people with the rebasing of the armed forces. That is why we have the number of properties that we have. Some of them are being kept empty specifically so that families can move in when appropriate. That is one side of it. The other side is that if we do not have enough accommodation in that particular area, we will rent on the open market for them, in order to be able to provide a set of services or a service to those individuals where they will not pay any additional rent. We will pay the additional rent but put it into the private sector until we can get everybody into quarters, as we would wish to do so. We are very clear that any money that comes in from the rent is going into the accommodation space, but obviously we have 40,000 quarters. We have slightly fewer people living in SLA—single living accommodation—but not significantly fewer. We therefore want to make sure that the entire offer, whether people are living in single living accommodation or in service families accommodation, is as appropriate as possible. So we want that money to go into both.

Mrs Trevelyan

You talk about renting if there is a need in a particular area. Why are you not proposing to build new homes?

Lieutenant General Nugee

We are doing that as well. We are building an additional 400 homes in the Larkhill area, because we have a number of regiments moving down there. We are going to have five regiments there; we have two regiments there at the moment. There is a very significant investment, because there is not sufficient local provision in the area. We therefore have to build our own, and we are very happy to do so. In the Tidworth area, there was a local initiative to build more homes; we have taken them as well to make sure we have sufficient homes.

Caroline Flint

Will the MOD hold those homes, rather than passing it over to Annington? Just so I am clear: you said you are building more homes—

Stephen Phillips

Who is going to own the houses?

Caroline Flint

Who is going to own those houses that you are building?

Lieutenant General Nugee

At the moment, as I understand it, it will be the MOD. We have houses outside the Annington Homes contract that are owned directly by the MOD.

Caroline Flint

And there is no change proposed for that?

Colin Wood

Not as far as I am aware, no.

Chair

And the maintenance contract applies to both?

Colin Wood

Yes.

Mr Jackson

Obviously the Department has a strategic objective to release land for capital receipt, and particularly for new residential building in the private sector. That is a strategic objective, but is there also a strategic objective to ring-fence some of that money to put back into new housing for service personnel in line with the current SDSR and the new one?

Lieutenant General Nugee

Is that to me or to the Department?

Mr Jackson

Either of you.

Colin Wood

I’ll take this. In terms of estate optimisation, the intent is absolutely to make the estate self-sustaining, so any generation through capital will be reinvested back into the estate.

Mr Jackson

Because obviously you are releasing land in places like Hampshire and Kent, where property values are buoyant and increasing, one assumes that you can therefore reinvest some money back into military bases, to provide very good quality new build for service personnel across the country.

Colin Wood

The intent is to reinvest back into the estate.

Mr Jackson

Is there a plan for that?

Colin Wood

Once we start to dispose of assets that are no longer required, the revenue generated after treatment would go back into the estate.

Mr Jackson

Okay, but where is that written down? It is an objective, but is it part of a plan with a timeline?

Colin Wood

It is part of a plan with a timeline. We have something called a footprint strategy, which stretches out to 2040. It is a 25-year strategy looking across all the defence estate, making sure that whatever the defence outputs are is enabled by military capability and underpinned by the right level of infrastructure. Where we no longer need that infrastructure over the next 25 years, we would then look to dispose of it.

Mr Bacon

May I ask Mr Lumby a question? It says on your CV that you have been managing director of Carillion Defence since 2002, and that you were managing director of Carillion Infrastructure from March 2002 to October 2002. So when did you become managing director of Carillion Defence?

Richard Lumby

In November 2002. I was managing director of Carillion Infrastructure Services from something like February through to November.

Mr Bacon

So for most of that year. And then towards the end of that year, you became managing director of Carillion Defence. It then says that during the period 2004 to 2006, you were “also responsible for Carillion’s Education, Local Authority and Courts activity.” That’s correct, is it?

Richard Lumby

That’s correct.

Mr Bacon

So you have been responsible for this defence area for 14 years.

Richard Lumby

I have been responsible for Carillion’s defence activity since then. Our contracts in the round between 2002 and 2005 were nominal. The contract growth and the appointment of us into the regional prime contract and housing prime contract took place in 2005. Before then, it was a limited number of two or three contracts. [Interruption.]

Chair

We will have to pause for the vote. I suggest to colleagues that we will get started again as soon as four of us are back, so if we can be quick, that would be great. Apologies to our witnesses. Sitting suspended for a Division in the House. On resuming—

Mr Bacon

Mr Lumby, we were just trying to establish your CV. From your answers, we didn’t fully hear. You became the managing director of Carillion Defence in around November 2002. Then you mentioned something about an intervening period of three years, and something that happened in 2005. Can you remind us what that was?

Richard Lumby

Yes, certainly. The MOD and Defence Estates, as it was then, re-looked into the way they were contracting in the early part of 2000, as they had a major improvement programme to see how they could contract. A number of contracts came out, including the regional prime contracts, and they were well signalled in the early part of the 2000s. We looked to bid for them. We bid for a number in the early years but did not win them, and a number of us decided to put in together to target those larger new contracts in particular. At the time—2000 through to 2005—we had two or three small consultancy and construction contracts. That was all through that period of time. Most of that period was spent preparing ourselves and bidding through the bid process for the contracts that came out at that point.

Mr Bacon

The bigger contracts that came from 2005 onwards?

Richard Lumby

Absolutely. Late 2005 and early 2006.

Mr Bacon

Right. So you’re saying the bigger contracts have been around for the last 11 years, although you have been around since late 2002 in this particular defence role.

Richard Lumby

Absolutely, yes.

Mr Bacon

But it says on your CV that you also had education, local authority and courts activity responsibilities. Part of me is wondering whether you were being diverted in too many different directions.

Richard Lumby

During that period of time, as I said, it was mostly a bidding period for us, rather than an operating business period.

Mr Bacon

I see. Fine. What I really cannot understand is this: when we did our last Report on this in October 2009, when you had been into the operating phase for four years, according to your own account, it said that many families had very limited information, if any, about the properties they were allocated and in many cases saw the houses for the first time only when they moved in. Many were dissatisfied with cleanliness. The level of first-time repairs was low. The communication of progress to occupants was poor. All of that was happening four years after you took over, but most of what we are talking about in this more recent Report has happened since then. We heard stories of people having cookers that were broken and not fixed for months, so they could not cook food for months. Did you hear about those stories at the time?

Richard Lumby

Yes, we did.

Mr Bacon

Right, and what did you do? Did you say, “I’m sorry, our IT system doesn’t work”?

Richard Lumby

No, we did not say that.

Mr Bacon

So why weren’t they fixed more quickly? Plainly, it might be difficult to maintain houses if they are old, but I have been looking on my iPad and you can get a decent cooker for between £300 and £400, with either a gas or electric hob and an oven underneath. Of course, by bulk buying you’d get a lot more for your money than that. You could have put 1,000 or 1,500 cookers in a warehouse, or perhaps split them up among three or four warehouses around the country, employed a couple of blokes in each one who knew how to install cookers, and when you got a call you could have just sent them in a van and fixed it, couldn’t you? Did that kind of thing happen, or not?

Richard Lumby

That is the kind of way we operate.

Mr Bacon

I’m not talking about now; I’m talking about then.

Richard Lumby

And then.

Mr Bacon

So why did it take months? Why were people without working cookers for months? That is what I cannot understand.

Richard Lumby

Clearly, where we have those problems, and there have been some, we have to put that right.

Mr Bacon

Forgive me, but if I can just deconstruct that sentence, you said, “Clearly, where we have those problems, and we have had those problems, we have to put them right.” That is a sentence and it is an answer, but it is not an answer to my question. My question was: why wasn’t it done? What was difficult about it? That is what I don’t understand. I can understand that computer systems don’t work and you have to do something else, but we won two world wars with mostly card indexes. Where there have been problems in other areas—for example, foot and mouth—when people could not make things work they reached for makeshift solutions with spreadsheets, and it did the job. Why were families waiting for months? I just cannot understand it.

Richard Lumby

I think the logic that that would be the case is absolutely fair. For the vast majority of that period of time we hit our targets and managed to achieve what we do. Individual cases where—

Mr Bacon

That is not the evidence we heard from the families. In fact, we heard the contrary: that it was being said that things were going to improve. We also heard that it is widely acknowledged that in the last two or three months there have been marked improvements.

Richard Lumby

Yes.

Mr Bacon

Funny that. Of course, that was when it was known that the NAO was starting to look at this area again. We heard in the evidence that there were promises that things were going to improve, but then they didn’t, and it carried on being the case that the cooker didn’t work for months, and that the heating didn’t work.

Richard Lumby

I would like to look at the improvement plan and the coincidence. It is absolutely right that from the early part of this year—

Mr Bacon

My question isn’t about the last two or three months; it is about why, two, three or four years ago, when cookers weren’t working, it took months to get them fixed. Can you please explain to me why that was the case?

Richard Lumby

I cannot explain to you why individual items did not get fixed. En masse, this was not something that was a problem. Clearly the recommendations and the anecdotal and physical evidence provided at that point pointed to this needing to be improved.

Mr Bacon

The thing is, as Mrs Trevelyan said, this is not new. It has been going on for a very long time, and it is so straightforward. Most of us have had occasion to rent a flat at some point or other. We either get it massively clean ourselves by getting on our hands and knees, or we pay the money to a contractor who comes in and does a blitz clean so that the new tenant gets a property that is looking spick and span. There is nothing that difficult about it. We got a man to the moon in July 1969. That was 47 years ago. This is a lot easier than that. For many of the past 47 years, it has been done successfully, but you are sitting here unable to explain why it wasn’t done.

Richard Lumby

I am able to take you through some of the issues that we face as a contractor, and we clearly failed in a significant amount of the activity that we carry out all the time. Our commitment is to improve, and we are improving, and we’re picking up the learning at any one point. In the new contract, the arrangements for providing white goods are slightly different from the old contract. We put that in place, and we are carrying out that activity in that way.

Mr Bacon

My point, which is why I started with your CV, is that this has been on your watch the whole time. You were in the defence space from November 2002, although you were actually there in early 2002. This Report was in 2009. You were there, and you are still there now. This has all been on your watch. When you say, “We let ourselves down,” what you really mean is that you failed, didn’t you?

Richard Lumby

In those instances, we failed.

Mr Bacon

I didn’t mean “we”; I meant you, Mr Lumby.

Richard Lumby

Me, Mr Lumby, as part of the operation—

Mr Bacon

You failed. You have been in charge of this thing the whole time, haven’t you?

Richard Lumby

I have been in charge of Carillion Defence and I have been on the board of the joint venture.

Mr Bacon

So when you say, “We let ourselves down,” what you really mean is, “I, Mr Lumby, failed.”

Richard Lumby

In that context, I absolutely take the responsibility inside Carillion for operating the contracts and being responsible for the contracts.

Mr Bacon

I know you take responsibility for it; that is why you are here. But do you agree that you failed?

Richard Lumby

I agree that where we failed in those instances, yes, we failed.

Mr Bacon

You said “we” again. I wasn’t talking about “we”; I was talking about you.

Richard Lumby

I failed to make sure that the business delivered in those instances, of which there are—the number of activities we carry out in the year are in the hundreds of thousands.

Chair

Mr Lumby, you are talking constantly about process and KPIs. We know that that is the language of a management contract, but this is a contract about homes and people.

Richard Lumby

Indeed.

Chair

Does that resonate with you?

Richard Lumby

It totally resonates with me, and it resonates with our business.

Chair

Do you think it is okay for people to have to go and buy McDonald’s for a week because their cooker is not working?

Richard Lumby

I don’t, but I will say that we operate under the requirements under our contract, and in some instances, where there is a failure of part of the cooking appliances in the kitchen, we have some time to put it right, because not all appliances are available—

Mr Bacon

They would be with my little proposal of—

Chair

Most tenants would understand the negotiation about the right type of cooker coming at the right time. There is a human element to this, but it doesn’t sound very human in the way you talk about it. You are talking about processes, structures and IT systems, but at the end of it, there’s a human being. This is a different sort of defence contract from some of the others Carillion may run. Were you the right organisation even to bid for it?

Richard Lumby

I believe we are. I believe we are committed to doing that, and I believe we will deliver it. We have invested significantly to make sure that we are able to deliver the customer experience as against just the contractual KPIs. We continue to do so.

Chair

Okay. I am going to ask Caroline Flint to come in on this point and then come back to Anne-Marie Trevelyan.

Caroline Flint

I want to come back to the Permanent Secretary on this. When it comes to supporting service families, has the MOD considered looking at a completely different model—maybe one that is based on housing trusts or ALMOs? In the areas where the accommodation is, those well-established housing organisations might provide a better service to the families, in line with the service they provide for other social tenants—for want of a better word—they are looking after. Given that a lot of housing trusts and ALMOs are now looking to support private sector landlords as well, a different packaging of the contract might be helpful. Is that something the MOD is prepared to consider?

Stephen Lovegrove

I am not aware that we have considered that. It may have happened. Is it something we are prepared to consider? I will certainly take that away and look at whether or not that is possible or would provide any advantages. I will ask General Nugee to talk you through some of the new initiatives being made for service families and armed forces personnel. It is still the case that in comparison with social housing, and certainly in comparison with private housing, armed forces personnel get a good financial deal out of the accommodation offered to them. I think it says in the Report that roughly 12% of pay goes on accommodation for service families. It is 30% for people in social housing and about 40% for people in the private sector. There are some significant advantages to the system we have at the moment, but it certainly does need to evolve.

Caroline Flint

I am not sure that that cuts it really, because part of that contract is in recognition of the particular pressures that service families face—

Stephen Lovegrove

Absolutely.

Caroline Flint

—both those on the frontline and the families who support them. I am sure that you are not trying to say this, Permanent Secretary, and that you would not want anyone to go away feeling that somehow poor standards, such as not having a cooker for months or being left without a boiler, is a price you pay for only having to pay 12% of your accommodation costs.

Stephen Lovegrove

Thank you. I am absolutely not saying that. I would like just to separate the two issues from the basic estate and the maintenance of the estate. I think the problems here are principally about the maintenance of the estate.

Caroline Flint

But I feel that what’s coming across here is this: there’s one thing sending people out to do a maintenance job—as MPs, we all have to deal with that with any social housing in our areas—but then it’s about the actual housing management side of it and the customer contact side of following up these issues and being on top of them. For example, in my ALMO in Doncaster, regular checks on boilers and cookers are part of the job that they do, to pre-empt any problems in anything failing for the families that they look after.

Stephen Lovegrove

These are absolutely some of the targets where there needs to be very, very significant improvement over the performance in the last 18 months.

Chair

Mr Lumby, is it a requirement of the contract that when the property is empty, when one tenant leaves and another moves in, that they check the working condition of the cooker?

Richard Lumby

Yes.

Chair

So that is a condition of the contract and yet we’ve heard examples where that clearly hadn’t happened.

Stephen Lovegrove

There are some headlines of the contract terms in figure 10 in the Report. I think that’s covered in there.

Mrs Trevelyan

Just before we move on to the roll-out of CAAS in more detail, so that those watching and those of us here can understand it better, I have another question. This is a difficult question for you, Mr Lovegrove, I know, but perhaps Mr Wood is able to explain it better. Just to be clear, when this contract was looked at and you picked the cheapest one—and we get where that was coming from—was anybody doing the calculation of retention risk and the cost of losing some of our highly trained, very heavily taxpayer-invested-in individuals in the armed forces, compared to the money you were going to save on this contract?

Colin Wood

I believe the contract was let with the full belief that it would deliver the appropriate service, and I should say that I’m an ex-serving officer of 20 years, so I know how important it is to get this right. So, the contracts were not let with an output that we would start losing people off the back of it. I think the key—

Chair

Sorry. Can you speak up, Mr Wood? I didn’t hear that sentence.

Colin Wood

Sorry, excuse me. The contracts were not let with the thought in mind that it would affect retention rates at all. The contracts that were let were believed to be appropriate. They haven’t performed at the right level over the last year. They have now started performing to the right level, and over the next period we’ll find those contracts are fit for purpose with the right monitoring that we have got in place.

Mrs Trevelyan

So when the Defence Infrastructure Organisation is looking at this wider estate management, how are you assessing retention risk from a financial point of view? I ask that because it makes no sense to me, as an accountant, to have a Typhoon pilot’s wife say to me, “He loves his job, but we can’t do this anymore, and he’s agreed it’s me or the plane—it’s me.” There was £2.25 million worth of investment and 15 years of commitment to the RAF, and because—bluntly—CarillionAmey and DIO, because they were brought in in this particular instance too, failed to solve a human-element problem, we lost one of our best. That is completely against all sense of value for money that any Department should be thinking about, and I worry that the MOD doesn’t think about its human capital in that way at all. You know, the overspends are famous, but actually the human capital is vital. None of the ships and none of the planes works without them. What do you do—day in and day out—to understand and value that from a value-for-money point of view long-term for the MOD?

Colin Wood

I ensure that my part of the organisation works very closely with General Nugee’s part of the organisation. So we are very embedded in the new employment model—the future accommodation model that’s going forward—and we need to make sure that any decisions we made are either in concert with anything that General Nugee and the team come up with, or anything that we’re observing that we can feed in, so that General Nugee can then look at different strategies going forward. So, I see it very much as a two-way process, that the learning—and let’s be clear that there is huge learning from what we’ve gone through over the last year—can absolutely be played back into that area.

Chair

Lieutenant General Nugee, do you recognise what Anne-Marie Trevelyan is describing?

Lieutenant General Nugee

Yes. It is always a sadness that somebody leaves who has to make a choice between their family and their job.

Chair

Do you acknowledge any responsibility for that? I mean, the case that Mrs Trevelyan described was because of the failure of this contract.

Lieutenant General Nugee

The voluntary outflow rates are my responsibility in terms of the overall central defence view. The single services are responsible for their own people, but a lot of the policies come from my area. I absolutely accept that, and it is regrettable if anybody feels they have to leave as a direct result, but we do know that the effect on one’s family is the most quoted reason why people leave. It is not just about accommodation; there is a whole host of reasons why people leave. We are doing as much as we can to try to support the family, which is why we have introduced a new families strategy, why we have a new families plan and why we are doing spousal employment trials as part of the covenant, in order to try to improve that relationship so that people do not have that reason for leaving.

Chair

In terms of the chain of command, one of the challenges we have had in talking to colleagues around the House is that very often people feel that, because of the chain of command, they cannot go and speak even to their MP about their concern. As these go up through the chain of command, do they get to you? Does the chain of command pass these concerns upwards, if indeed service families feel able to raise them?

Lieutenant General Nugee

I think it would be fair to say that not all get to me, but certainly a proportion do, and I can assure you that the defence board and the people committee, which is a sub-committee of the defence board, look at voluntary outflow every single time they meet, to discuss what is happening with retention, why people are leaving and what we can do about it.

Chair

But if there is a problem before people leave, where does that go? There is a big issue, which Anne-Marie Trevelyan has picked up on.

Lieutenant General Nugee

The people leaving are the symptom, obviously, not the cause, and we look back to the cause to try to stop people leaving who decide they want to leave. Obviously, there is churn in every organisation, but we would prefer that our highly skilled pilots, highly skilled nuclear engineers and highly skilled whatever else stay in the armed forces for as long as possible.

Chair

We recognise that there is an importance to the chain of command approach, but this is about the welfare of people who are not in the forces themselves—the families. There is a big concern for us as democratically elected MPs that people are frightened and feel they can’t come to their MP, so perhaps you could be clear. If you are a forces family or somebody with a problem with your welfare or your housing—something that is not directly related to your actual service conditions, in terms of flying a plane or whatever you are doing on your ship—can they go and see their elected representatives? Are they allowed to go and raise these issues?

Lieutenant General Nugee

Yes. And we have the families continuous attitude surveys, which they can fill in, and they can talk to their families federations, which they do an awful lot of, and as you have heard already—

Chair

They are allowed to go and see their MP; they would not be disciplined for going to see a Member of Parliament about their housing problem?

Lieutenant General Nugee

No.

Mr Bacon

On that point, General Nugee, you answered Mrs Trevelyan by saying it is always a sadness when people have to choose between their commitment to serving in the armed forces and their family. I’m not sure that is the choice. Mrs Trevelyan will correct me if I am wrong, but it’s a choice between a commitment to serving in the armed forces and having a damp, mouldy house with a broken cooker. That is the choice that they are being forced to make, and when you say, “It’s regrettable when we lose an RAF pilot,” apart from anything else—I think this is the point Mrs Trevelyan was making—it is stonkingly bad value for money, having spent all this money on training a pilot or whatever. There are lots of other kinds of military personnel who cost a great deal to train. I know that for driving a truck that can have nuclear weapons loaded on the back of it, it costs several million pounds. I have spoken to armed forces personnel who have done that. There are lots of areas where this costs a great deal of money, and then you lose them because of something as simple as a cooker that Mr Lumby can’t fix over a period of several months, so they’re having to eat pizza and McDonald’s not for one or two days, which you could understand, but for weeks and weeks at a time. It is staggeringly bad value for money. That’s the point. You do understand that?

Lieutenant General Nugee

I understand that completely. I think it is a real shame that this contract has failed to deliver what it was expected to deliver, and the direct effect is on our families. The effect it has had on our families is to lose confidence in our ability as the Ministry of Defence—and in me as the Chief of Defence People—to deliver the standards that we would expect, and that’s acknowledged. It has not done well; it has failed in its delivery over the period, and that is why the Secretary of State stepped in to try to make sure it is better. This has a direct effect on the families of the armed forces. I absolutely get that, and that is why we want to improve it.

Mr Bacon

Mr Lumby, I have one question for you, relating to paragraph 4.13, which says that “Between November 2014 and to the end of March 2016, the Department had paid £115.3 million to CarillionAmey under the contract.” Have you made a profit?

Richard Lumby

No.

Mr Bacon

You haven’t. You have made a loss.

Richard Lumby

We are not in profit. Our investment has been far greater than we expected. We have continued to commit to that. We have clearly got some backlog. We have taken some penalties. We have put some more people in place. We are doing that because we have to do it. We are compelled to do it, and we want to deliver a service to the service families, so—

Mr Bacon

The next sentence goes on to say that you had £10.4 million withheld “due to late completion of tasks”, of which the MOD “subsequently released £6.4 million”. So presumably there is £4 million of that to go. If you got all of that would you then be making a profit?

Richard Lumby

Marginally, if not losing; we are still investing a significant amount to complete our improvement plan. We have more or less completed the investment to get our IT systems completely running and operational, and that is the place that we are at. We would expect now, as long as we can drive the performance we need to drive without losing the sustainability of the performance that we have got, that we should at some point be able to make the contract efficient, and to make money out of it; but the most important thing to us is to drive and continue with the sustainable performance we have now, which is up at the KPI level, and that is our commitment, to do that, with the additional cost.

Mr Bacon

Just to be clear, over the last one to two years, you have lost money.

Richard Lumby

We have certainly spent more than we have earned.

Mr Bacon

How much?

Richard Lumby

I couldn’t tell you at this point.

Mr Bacon

You don’t know?

Richard Lumby

I will have to come back to you.

Chair

You can write to us with that.

Mr Bacon

How do you know? If you know that you have lost money, how do you not know how much? How do you know that you have lost money? If you don’t know what the number is, how can you tell that you have lost it rather than gained it?

Richard Lumby

I can tell you—and I will come back to you with that—that the investment that we have made, the cost is outstripping the revenues that we have received to date, and I can tell you that, because of the way that clearly we account for some of the things, they sit on our balance sheet, so it becomes a bit complex; but I can come back to you and tell you.

Chair

Just before I pass back to Anne-Marie Trevelyan, can I ask Mr Wood: earlier, in response to Caroline Flint, I think you said—I am not sure if I heard right—that you were unable to hold back more than £10 million of the contract. Is that right?

Colin Wood

Correct.

Chair

So actually, even if Carillion are putting money in this year, there is really not much of an incentive for them to improve if the contract is written in such a way that there is such a little penalty.

Colin Wood

I think in terms of contractual penalties it is not where we would want to be from a contractual perspective.

Chair

I know every Government Department always says that, but, ultimately, that is the backstop, isn’t it?

Colin Wood

I think in terms of incentive we have been very clear that if the performance doesn’t improve we would look to terminate.

Chair

And what would it cost the Department to terminate the contract?

Colin Wood

I don’t have that figure to hand. I am very happy to provide it.

Chair

If you could provide that, please do, because usually—if is written up this badly it sounds like there is a cost.

Richard Lumby

There are two parts of this contract that incentivise us to perform. One is clearly that there is a penalty should we not; the other point is the price for the work that we do, regardless of the number of times we turn up, regardless of our efficiency, is set. So we have to spend the money. We are incentivised, clearly, to be as efficient and effective as we possibly can to deliver the service to the people in the homes that we have to. So for us it is a massive disincentive not to perform. So it is on a fixed-price contract; so we get paid a fee—

Chair

A massive incentive not to perform?

Richard Lumby

Sorry, a disincentive.

Chair

Sorry, two negatives. I was just running over the answer in my head.

Chris Evans

Have you had a bonus this year?

Richard Lumby

I received a bonus.

Chris Evans

So you failed the contract and you received a bonus.

Richard Lumby

A substantive part of my potential bonus I did not receive.

Chris Evans

But you received a bonus.

Richard Lumby

I received a bonus, yes.

Chair

Can you tell us how much that was?

Richard Lumby

I would rather tell you later, but I can tell you that 77% of my bonus that I could have earned was retained by the company from me this year.

Chris Evans

I come from a banking background, Mr Lumby, and I will say this: I was based on bonus, and if I had failed the way you failed, they’d have sacked me. They wouldn’t give me a bonus.

Chair

Okay, Mr Evans, you’ve made your point. I am going to move on to Anne-Marie Trevelyan.

Mrs Trevelyan

Mr Wood, perhaps you could help us clarify, to understand the combined accommodation assessment system, which is rolling out. I think the families understand, they said earlier, rents going up and that a new system was needed. The Secretary of State was very clear that he understood, and was wanting it to be fairer, more transparent and simpler. Those three words have been repeated to me by so many families, followed by “It isn’t any of those things.” There are key parts to that. Whilst the system is more complex and difficult to navigate for the family, the premise on which all rebanding was done was a survey of the home. Can you say to me with confidence that every single home was surveyed? If not, when you did a street by picking one home and deciding that they were all the same, how on earth did you think that that system was going to give the right answer? It hasn’t, in very large numbers.

Colin Wood

To be clear, not every home was surveyed. At the launch of CAAS, 68% of homes were surveyed, based on what was termed a “beacon house”. A house was selected in the middle of the married patch and then used to extrapolate across the rest of the estate. We are now at 80% across the estate and our intent is to move forward to 100% across the estate. We have heard evidence from the previous panel that that wasn’t done fairly. I don’t have data to support that absolutely that I am aware of. There is a complaint system in place, and I believe we have had approximately 1,800 complaints, of which approximately 47 have been upheld and taken forward. In terms of the absolute data, General Nugee may be closer to that than I am, but in terms of the survey and the way in which it was done, we surveyed 68% at kick-off, 80% now and we are moving towards 100%.

Mrs Trevelyan

Are you comfortable that the information coming out of the surveys is accurate?

Colin Wood

I am. We are using two professional surveyors to provide that information—this is not internal to MOD—and we are basing it very much on their professional opinion.

Mrs Trevelyan

Could you explain for my colleagues and those watching exactly what criteria are used in the house survey? How do they assess the age of the kitchen and the bathroom and the state of thermal efficiency to try to reach the DH standard or above?

Colin Wood

In terms of the absolute technical detail, I can’t provide that. I do understand what is required from a Decent Homes perspective and from that perspective, we are currently sitting at 88% Decent Homes with 79% being what we would term Decent Homes-plus.

Mrs Trevelyan

There is a particular guideline that has caused a lot of concern with families. It is a DCLG guideline, which obviously the MOD is choosing to work from, that says that a kitchen must be of adequate size and layout for the size of the property. That is a fairly broad and not very specific description of a kitchen. Some of the stories and paperwork that I have seen suggest that it is acceptable to have a fridge or a freezer but not both because there isn’t the space, or a washing machine or a dishwasher because the plumbing is there for one. At what point do you—those in control of this housing, controlling the lives of the families and, with that, their day-to-day existence—accept that there is a need for families to have functional kitchens and bathrooms, and accept that age, which is often not identifiable because it seems that the long-standing maintenance contracts have not kept records of when the kitchens or bathrooms were put in, just isn’t adequate? How can you fix that so that in the next year or two, as these bandings settle in and new people move in, they accept that it is at roughly the right level? How can you do that, because it doesn’t seem to me to be working at all well?

Colin Wood

I think we have to listen to the feedback that is provided to us and make sure that we engage properly to fix any issues that come up. We will have a much better idea once we have 100% of the estate surveyed. In terms of the technical detail about whether it is a fridge or a freezer, I am afraid I cannot comment directly on that.

Mrs Trevelyan

It is a challenging problem, but it is the question of how you convince those people out there. While you are getting it right—this is a question for you, I guess, General Nugee—there are a lot of people out there who have had 18 months of hassle, who continue to be frustrated, and for whom the uncertainty of your future accommodation model is not clear to them. There is no reason why it should be; it is not clear to you yet either. How can you offer a level of reassurance to those families and to their serving partners? They are on the end of a phone—as you know, you get one call a week from your ship, and all you get is the hassle. How can you give them reassurance—other than making the contract work—so that we don’t lose them? The confidence is shot; it is still not right and the bandings aren’t right. People will move into new homes and they will challenge the bandings. How can you give them confidence?

Lieutenant General Nugee

I can answer that in a couple of ways. First of all, if any home does not meet the Decent Homes standard—it is not our standard; it is the DCLG standard, as you have pointed out—we will not allocate that from 1 April this year. There are some people who are in what we have termed DH-minus properties, because, as you heard from the permanent secretary, we only have 88% in the Decent Homes or Decent Homes-plus categories. There are some people who are in properties—I think you have heard from some of them today—that do not meet the standards that we would wish to meet. They are offered the opportunity to move, if they wish to do so, to get out of the property and into a higher quality property. I would be much happier if no people were in DH-minus accommodation, but some people are in those and it is up to them as to whether they wish to move or not. Some will say that the hassle of moving is worse than the quality of the property. I would reassure by saying that the quality of the property is the most important element of the categorisation for the CAAS standard. The banding cannot be above grade C—it goes A to I—unless it is DH-plus standard, so what we have tried to do, trying to be as fair as possible, is to make sure that we acknowledge only those Decent Homes-plus ones get the higher bands. The third piece I would say is that the Armed Forces Pay Review Body is the organisation that sets the amount of money that you pay on each band. It determined this year not to raise the accommodation price levels per band in line with inflation, but to freeze them, in order to accommodate the fact that a number of people were going up from one band to another. I would try to reassure by saying that we absolutely understand that the accommodation model is really important as part of the offer. I regularly talk to people about the offer, which is about more than accommodation; it is about an awful lot of issues. Where we can, we will try to make the offer fairer. I am disappointed to hear that people do not think it is fairer, because I think it is, and I will give you just one example: the difference between the top band and the bottom band is a fixed 10% per band, and it is down to 8%. Under the old system, you had generals getting a higher discount than corporals. That is unacceptable. That, to me, is the answer to why it was so important to bring this new system in as soon as we possibly could—to get rid of those discrepancies. People may not have seen them, but they were there. What we wanted was a much fairer system for our people, and a fairer system across the board. I would reassure by saying that it is up to the AFPRB as to where it sets the rates, and it is up to the AFPRB to make sure that it raises them or not, depending on what it feels the standard of the accommodation is. We have absolutely not taken more money out than we would have done had the previous grading system been done properly. The intent was not to take any more money out of the system than if it had been done properly, but the previous system was not done properly at all. It was open to abuse, as you have heard from the families federations. We hope we have solved that, and we hope we have a much fairer system. It is interesting that the 1,800 appeals that my colleague mentioned are much more detailed than we expected. That is a positive sign that people really understand it and have got their heads around it. The appeals are taking much longer to answer than we would have liked and expected, because they are much more detailed from the people appealing. It is positive that they feel that they can appeal with details and that we are looking into them. We are trying to be as fair as possible.

Chair

I am going to bring in Deidre Brock briefly, because she has a particular point about Scotland.

Deidre Brock

As a Scottish MP, I have a quick question about the situation in Scotland. The report focuses pretty much exclusively on conditions for MOD housing conditions in England. Housing is devolved to the Scottish Parliament. For example, the MOD has to conform to Scottish quality housing standards, as I understand it. I wonder which Committee of the Scottish Parliament the MOD presents to in order to explain how it manages that estate in Scotland.

Lieutenant General Nugee

I cannot answer that.

Colin Wood

I’m afraid I cannot answer that.

Chair

To be fair, Mr Lovegrove has been in post for a week.

Stephen Lovegrove

I am happy to get back to you on that. Of course, accountability—

Deidre Brock

I would appreciate some clear understanding of it, because I have been looking and I find it very opaque. I would appreciate some clarity.

Stephen Lovegrove

I understand. Accountability is important, and there are homes up there, so we will look into that.

Chair

It is important. You understand the interest of elected representatives. Wherever we are, we have a role to play.

Mrs Trevelyan

Just a quick question, Mr Wood. Could you confirm that the DIO was fined for failure to meet health and safety regulations on gas safety certificates?

Colin Wood

It didn’t receive a fine; it received a warning from the Health and Safety Executive in terms of performance. That performance was absolutely recognised and address, and we moved—I can’t remember the exact date; probably within about 8 months—from 417 outstanding gas safety certificates to 2 at the end of May. It is an unacceptable situation from our perspective and we have worked very hard to fix it.

Caroline Flint

Lieutenant General Nugee, at the start of the session you were explaining about the support for people to buy their own property. Could you clarify that for me? Were you seeing that as a way in which service families would buy a property in the locale of where the base is and where they are currently accommodated in order to move people out of that accommodation we have heard such terrible things about? I understand that, but I am an MP in Doncaster and I think South Yorkshire is a pretty strong recruiting ground for the Army. From my experience, a number of families want to buy back home in Doncaster for when they leave the service, because that is where their family is. I am trying to understand how what you are saying actually helps those families, because the housing is pretty expensive in a lot of places where accommodation is situated, in Hampshire and elsewhere. I did the armed forces scheme some years ago for the Army, and for the average soldier and family to buy in some of those areas, even with allowances, is a bit rich. They want to buy back at home. Could you just clarify that for me? If they want to buy back home in Doncaster for their eventual release from the Army or after leaving it, that is not going to help them move out of accommodation that they and their families are maybe not being best served by while they are serving in the Army.

Lieutenant General Nugee

First of all, forces Help to Buy is agnostic as to where you buy. The thrust is to try to improve people’s future prospects by getting them on to the property ladder at the earliest opportunity. It is not dependent on buying in the area that you happen to be serving in. You can buy in Doncaster or wherever.

Caroline Flint

Okay, that is helpful. You are not seeing this as a way to decant people out of the accommodation and thereby solve a problem for you in terms of all of the concerns we have had raised today?

Lieutenant General Nugee

No. I would go back and say we strongly believe in the service families accommodation provision at the moment, and therefore we would support that. This is not seen as a way of getting out of the service families provision. What we are trying to do is improve the lot of our people by getting them more prepared for moving into civilian life. The Army is not a good example in this respect; the Navy and the Air Force have more settled lives because their basing is more settled. I think you would find that most of them have bought where it is appropriate, as opposed to buying just by the bases.

Chair

Can I ask a few quick points? One is about right to buy for the forces. Right to buy has been a Government policy for other tenants. Is it something that is considered for any of the estate at all? Maybe it is too late now, because Annington Homes has got it. Is it not on the cards?

Colin Wood

I am afraid I don’t know the answer to that question.

Chair

Maybe it is too much of a policy question. We have heard slightly mixed messages from the families federations about how they consult on these things. It seems they meet the Minister regularly. I suppose you weren’t all here when the contract was let, but in terms of learning about the contract, when would you normally want to speak to the families federations? Do you think they have got something to contribute to the issue of contracts associated with the covenant?

Colin Wood

I do believe we should engage with the families federations. One of the key learning points from the letting of this contract is to do absolutely—

Chair

So it is a key learning point. What will you do in future that you did not do before?

Colin Wood

We have a quarterly meeting with the head of accommodation from Defence Infrastructure, who we meet on a formal basis, but we also have informal contact with the families federations as well.

Chair

So if they start flagging something up to you early on, will you listen and do something about that?

Colin Wood

Of course we will listen, and we routinely talk about feedback in terms of this contract and others. The families federations are an incredibly rich source of feedback, and we have both formal and informal contact with them.

Chair

We might come back to that for the next contract issue. In terms of the contract, Mr Lovegrove, I suppose this comes to you. You are the new permanent secretary, you can tell us it was all bad before and you are going to make it all marvellous. I am sure that is what we will hear, but more seriously, what lessons has the MOD learned about this for letting? This contract has been a disaster for families and it is costly, even though it was the cheapest bid. What are you going to do differently?

Stephen Lovegrove

When we are through this “get well” period, as it is called—hopefully it will be a success—there are two specific things that immediately occur to me. I would like to come back to you in further detail when I have a better understanding. I think that we need to be very thoughtful about assuring capability at the beginning of the contract. If we feel that a contractor might have overestimated their ability to fulfil the contract, we notice that. We can pick that up, rather than just rely on—

Chair

How will you do that?

Stephen Lovegrove

It may be that we will have to audit aspects of the contractors’ operations in a slightly more intrusive way than we do at the moment. There are auditing processes, but it may be that we have to—